Generally speaking, it’s not exactly an unusual practice to hire freelancers and contractors when running a business if you’re looking for flexibility and specialised skills in particular. Having said that, there are still a few tax implications that are different from simply hiring employees, so it’s paramount that you’ve got an idea of what these are if you plan on staying compliant with the Australian Taxation Office (ATO).
Employee vs. Contractor
First things first, you’re going to need to determine whether the individual that you’re about to hire will be classified as either an employee or simply a contractor. They may sound quite similar functionally, considering they’ll likely be doing the same work, but it’s still an important distinction that the ATO has strict guidelines for.
Put simply, any employees that you hire are typically going to have regular working hours, are entitled to leave whenever they want to, and rely on the employer to actually provide them with the tools or equipment that’s necessary in order to do their job.
On the other, contractors work a little bit differently, as they usually provide services for a set period of time instead of having the same working schedule as an employee. In addition, they’re often in control of their own work methods, and will need to invoice you directly for the services they’ve provided.
It’s important that you appreciate this specific distinction, as misclassification can actually result in penalties and back payments of taxes.
Tax Withholding and Superannuation
For employees, businesses generally need to withhold Pay-As-You-Go (PAYG) tax and pay superannuation, but this isn’t the same for contractors as withholding tax isn’t usually required unless the contractor hasn’t provided you with an Australian Business Number (ABN).
In these kinds of scenarios, 47% of the payment needs to be withheld. If the contractor provides the ABN, the business will need to pay them the full amount that was agreed upon, without needing to deduct the tax.
That said, superannuation obligations can still apply to contractors if they’re primarily working for one business and the contract is for labour they perform – so, even though they’re deemed contractors, you’re still going to have to make superannuation contributions for them.
GST and Invoicing
Furthermore, any freelancers or contractors who may be earning over $75,000 per year are going to need to register for Goods and Services Tax (GST), and then subsequently include GST on their invoices. Fortunately, businesses are actually able to claim GST credits on these payments, too.
These kinds of responsibilities are obviously a little bit stringent, so if you’re struggling to understand how to avoid breaking compliance laws then it’s recommended you consult with a tax advisor.